Smoke Clears, Fog Lifts, Revealing More Smoke and Fog; Sell the "No-News"; Point by Point Synopsis of the Merkel-Sarkozy Plan

A couple of people asked me yesterday to comment on the G-20 meeting. I responded "What did they say?"

Here is the answer. The G-20 leaders said nothing and did nothing other than to offer the hope that Merkel and Sarkozy would provide a solution on October 23.

The fog of G-20 is gone and all there is to see is a fog of vague promises by German Chancellor Angela Merkel and French President Nicolas Sarkozy that something dramatic will happen later.

Sell the "No-News"

Sunday evening to Monday morning provided yet another wild swing in the futures market. I went to bed at 3 AM and the S&P was up 10 points near 1230. However, the S&P gapped down 5 points and is now down 15 to 1204, roughly a 2% swing from the overnight high.

It's tough to say this was a "sell the news" reaction because there was no news, at least from the G-20. Instead, it was a "sell the no-news" reaction.

Germany Shoots Down ‘Dreams’ of Swift Crisis Solution

The G-20 did nothing and said nothing but today Angela Merkel lifted some of the fog from promises made a couple of weeks ago. The picture is now much clearer. Merkel pulled back the fog revealing more fog.

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

Obstacles to an EU accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe’s capitals over how to multiply the firepower of their bailout fund and recapitalize financial institutions. At stake is confidence in the 17-nation currency union that Merkel says she wants to preserve.

As EU officials move toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, bankers are pushing back. Options include altering a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings.

Five-Point Plan

In the works for the summit is a five-point plan to

Foresee a solution for Greece

Bolster the firepower of the 440 billion-euro ($611 billion) EFSF

Recapitalize banks

Push to boost competitiveness and consideration

European treaty changes to tighten economic management

Point Number One: Greece

Greece will default and it will be a hard default. The Yield on 1-year Greek bonds is hit a new high of 176% today, currently at 172%.

Merkel and Sarkozy have no plan for Greece other than to keep Greece in the Euro and that is not up to Merkel and Sarkozy, but rather up to the citizens of Greece.

Moreover, the smaller the haircut, the bigger the burden on Greece and the more likely Greece leaves sooner rather than later.

Can Roubini, Geithner, Merkel, Sarkozy, or any of the EU clowns tell me exactly where $40 trillion will come from? Here is the answer: They can't.

Moreover they cannot tell us where $2 trillion will come from either because all these plans for boosting the EFSF are against the German constitution, not that any of the EU jackasses care.

So let's assume the jackasses get their way. Exactly what good will $2 trillion do? Will the ECB just print the money and give it away? Will citizens put up with another $2 trillion highway robbery plan to bail out the banks and bondholders?

Point Number Three: Raise Capital

Banks are resisting mightily. Moreover, where does the capital come from? If from banks and bondholders, expect to see shareholder dilution. In fact, expect to see shareholder dilution regardless where it comes from. Is the stock market priced for that?

Sovereign debt ratings will sink like a rock if nations start bailing out the banks, yet again.

Point Number Four: Push to Boost Competitiveness

I happen to agree with this point. It is necessary. However, look at the pushbacks against austerity programs. Expect more pushbacks, in every country.

More importantly, even if there was substance to the plans (there isn't), and even if the "non-plans" were implemented (assuming Merkel and Sarkozy had plans that other nations would adopt), it would take years, not months to produce results.

Point Number Five: European Treaty Changes to Tighten Economic Management

Jackasses never give up. Point number five is proof.

Look at the difficulties just to get the latest EFSF to pass. It brought down the government of Slovakia. Perhaps the clowns manage to get away with boosting the "firepower" of the EFSF (illegally of course), but they still have to come up with the money.

However, getting 17 nations to agree to treaty changes has no chance at all. The German courts alone would stop it without a voter referendum and new German constitution.

Fog Behind the Fog

Thus, there is absolutely no substance to the Merkel-Sarkozy 5-point plan. There is only fog behind the fog, just as there was with the G-20 summit.